Brazil’s real dropped the most in emerging markets as the widest government budget deficit in four years revived concern that fiscal deterioration will lead to a reduced credit rating.
Swap rates climbed on speculation the shortfall will force policy makers to keep raising borrowing costs to curb inflation after they cut the pace of increases in half this week. The budget deficit as a percentage of gross domestic product rose in January to 3.6 percent, the widest since since 2009.
“The first sign this year of how the government is doing on fiscal policy was a disaster,” Jankiel Santos, the chief economist at Banco Espirito Santo de Investimento, said in a phone interview from Sao Paulo. “They’ve been saying they are going to be more thrifty, but it wasn’t the case in January.”
The currency depreciated 1.1 percent to 2.3443 per U.S. dollar at the close in Sao Paulo, paring its gain in February to 2.9 percent. Swap rates on contracts maturing in January 2017 rose 23 basis points, or 0.23 percentage point, to 12.28 percent, trimming their decline this month to 72 basis points.
Brazil’s gross debt rose to 58.5 percent of GDP in January, up from 57.2 percent in the prior month, the central bank reported today.
The real rallied on Feb. 20 when the government announced reductions of 44 billion reais from this year’s budget, allowing it to meet a primary surplus target equal to 1.9 percent of GDP. The spending cuts are part of President Dilma Rousseff’s strategy to shrink public debt and slow inflation, Finance Minister Guido Mantega had said.
‘Out the Window’
“All the promises went out the window” with today’s data, Daniel Weeks, the chief economist at Garde AM in Sao Paulo, said in a phone interview.
Moody’s Investors Service reduced its outlook on Brazil’s Baa2 rating, the second-lowest investment grade, to stable from positive in October, and S&P placed its comparable BBB on negative outlook in June. Both ratings companies cited deteriorating fiscal policy.
Brazil will probably keep the stable outlook on its credit rating this year because the government won’t change policies before the October presidential election, Moody’s analyst Mauro Leos said this week in New York.
The central bank lifted borrowing costs by 25 basis points to 10.75 percent on Feb. 26, half the pace of the previous six meetings, to curb inflation. The decision to raise the target lending rate left it at the same level as when Rousseff took office in 2011.
Consumer prices rose 5.65 percent in the 12 months through the middle of February, higher than the 5.62 percent median forecast from economists surveyed by Bloomberg and above the central bank’s 4.5 percent target midpoint.
To support the real and limit import price increases, Brazil sold $197.9 million of foreign-exchange swaps today under a program announced in December.
A government report showed yesterday that Brazil’s GDP climbed 0.7 percent in the fourth quarter from the prior three months after contracting 0.5 percent in the third quarter. The increase was bigger than all of the forecasts of analysts surveyed by Bloomberg.
Economists in a weekly central bank survey published Feb. 24 cut their 2014 growth estimates to 1.67 percent, the lowest level ever and down more than 2 percentage points from a projected 3.8 percent expansion a year earlier.